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Wall Street Socialism (or Robin Hood in Reverse)
By Robert L. Borosage
Huffington Post - Posted July 15, 2008 - 05:19 PM (EST)
This weekend, Treasury Secretary Henry Paulson, former
head of the Goldman Sachs investment house, provided us
with a perfect demonstration of Wall Street socialism.
He announced that the Bush administration would seek
congressional approval to bail out Fanny Mae and Freddy
Mac, the government created, but privately owned,
profit-making housing finance companies that hold or
guarantee nearly half of the US mortgage market -- some
$5 trillion in debt. Paulson seeks and will get an
unlimited line of credit to guarantee their debt, as
well as authority to purchase their shares to
supplement their capital base. The Federal Reserve
announced it was ready to provide lending while waiting
for Congress to act. Paulson said the new subsidies
were designed to sustain the two institutions in "their current form."
Perfect. The two institutions have always been more
foul than fish. Created by the government in the 1930s
to help lubricate the US mortgage market by buying
mortgages from the banks so they would have the cash to
make more mortgages, Fanny and Freddy were able to
borrow money at a discount because of a widely shared
assumption that the government would stand behind their
debts if push came to shove. Their operations were
regulated, limited by laws detailing what mortgages
they could assume (They were essentially prohibited
from diving directly into the subprime muck). But as
they grew and profited, their executives pocketed
lavish salaries and bonuses -- giving them an incentive
to grow even more (and as we discovered earlier this
decade, to cook the books). Last year, for example, the
Chair of Freddie Mac took home a cool $18,289,575.
Fannie Mae CEO Daniel Mudd reaped a 7 percent rise in
pay to $13.4 million in 2007 while the company lost
$2/1 billion and its shared fell 33%. Nice work if you can get it.
Now with the bursting of the housing bubble, push
surely has come to shove. Foreclosures are soaring, the
two institutions have sustained billions in losses,
their shares have plummeted, and, according to former
St. Louis Federal Reserve President William Poole, one
and possibly both would be bankrupt if their assets
were marked down to their current market value.
So now the Bush administration proposes to make the
federal guarantee explicit and even to offer taxpayer
money to help recapitalize the two banks if needed.
Everything has been nationalized -- except the profits
and the pay scales of the bank's executives.
That's right. If the guarantees work, private
speculators, having driven the stock down, will clean
up on the upside. And the bank's CEO's will continue to
pocket the multi-million dollar salaries that are de
rigueur on Wall Street. Call it Wall Street socialism.
Their losses are socialized; their profits are
pocketed. You and I will pay for their failures. And if
conservatives have their way, their families will
pocket their successes, without even having to pay a
tax for the transfer of the estates we've helped to create.
These enterprises are operating on our tab now --
completely. Why not just nationalize them, as even that
font of economic convention, Sabastian Mallaby
suggested yesterday in the Washington Post. Sure, we'd
have to add the $5 trillion in debt to the federal
balance sheet, but we could add the assets also. And
after Paulson's announcement, global investors are
already toting up their debts onto the federal balance sheet.
Why pay dividends to shareholders when they are
essentially playing with our money? Why pay managers of
public enterprises the bloated pay packages of Wall
Street speculators? Why allow them to finance lobbyists
to shield them from accountability? The fiction of
their separate existence has been exploded; let's save
the dough and run them efficiently.
Fannie Mae and Freddy Mac are only the most recent and
extreme version of Wall Street socialism. The Bush
administration has done essentially the same for
private providers of college loans. The Federal Reserve
has made taxpayers the guarantor not simply of the
banks that it regulates, but the shadow banking system
of hedge funds and investment houses that it doesn't
regulate. After the bailout of Bear Sterns, they
basically are gambling with our money. The Federal
Reserve has now traded more than $500 billion in
federal bonds for the toxic paper of private banks and
investment houses, some $200 billion of it in mortgage
backed securities, worth dimes on the dollar. This
massive subsidy -- justified as necessary to keep the
banking system afloat -- is not accompanied by limits
on what gambles the speculators can make, how much debt
they can take on, what rewards they can pocket. They
are playing with house money -- not exactly an incentive for prudence.
Republicans seem ideologically committed to these kinds
of arrangements. In Medicare for example, conservatives
have demanded that the government subsidize private
insurance companies to compete with public Medicare,
even though Medicare provides healthcare much less
expensively. When Bush and the DeLay Congress drove
through the prescription drug bill, they included a
provision that PROHIBITS Medicare from negotiating
cheaper prices for drugs, effectively turning the bill
from a benefit to Seniors to a multi-billion subsidy to
private drug companies (not surprisingly, after Wall
Street, the drug companies finance one of the most
lavish and powerful lobbies in Washington ).
Now it makes sense to me for the government to
subsidize housing mortgages and college loans.
Encouraging home ownership and higher education are
central to sustaining the broad middle class that is
America's triumph. But I can't imagine why we need to
let bankers and investors pocket the upside, when they
are playing with our money and we're covering their
losses. Public enterprise may be staid and
bureaucratic, but it's a lot cheaper and more efficient
than the perils of Wall Street socialism.
[Robert L. Borosage is the president of the Institute
for America 's Future and co-director of its sister
organization, the Campaign for America 's Future. The
organizations were launched by 100 prominent Americans
to challenge the rightward drift in US politics, and to
develop the policies, message and issue campaigns to
help forge an enduring majority for progressive change
in America . Most recently, Borosage spearheaded the
Campaign's 2002 issues book, StraightTalk 2002,
providing activists and candidates with distilled
messages on kitchen table concerns, from jobs to
affordable health care. Borosage also helped to found
and chairs the Progressive Majority Political Action
Committee, developing a national base of small donors
and skilled activists. Progressive Majority recruits,
staffs, and funds progressive candidates for political office.
Mr. Borosage writes widely on political, economic and
national security issues for a range of publications
including the Washington Post, the Los Angeles Times,
and the Philadelphia Inquirer. He is a contributing
editor at The Nation magazine.]